23 Jun 2020
To say that COVID-19 is having a significant impact on the UK’s economic landscape is an understatement. Just last week, Rishi Sunak confirmed that the country’s debt is now worth more than its entire economy after the government borrowed £55.2bn in May – the highest amount since records began in 1993.
Issues around debt are also affecting individual businesses across the UK, with an increasing number struggling to meet debt requirement obligations. To maintain the cash flow needed to stay operational and pay off debts, some borrowers are restructuring operations by scaling back or reorganising assets and liabilities.
Other companies are taking steps to restructure their debts. There are a number of ways to do this. Lenders might agree to restructure debt through interest deferrals or cancellation, exchanging debt for equity, or through the borrower entering into a new subordinated debt.
Let’s take a closer look at some of the options that might be available to business borrowers.
Debt refinancing is the process of replacing an existing debt with another that has more favourable terms and/or conditions. It involves the borrower settling their current outstanding debt by issuing a new one.
Debt refinancing is most commonly used to take advantage of a better interest rate, reduce monthly repayments by taking on a new debt with longer terms or switching from a variable-rate to a fixed-rate – or vice vera.
Bear in mind that debt refinancing may not always be the most cost-effective route. For instance, a debt might have call provisions that mean a penalty is incurred if the borrower refinances. Closing and/or transaction fees may also apply.
A debt/equity swap is where a company’s debt obligations are swapped for equity. For publicly traded organisations, this equity usually comes in the form of bonds for stock.
A debt/ equity swap is typically implemented to avoid placing a company into liquidation or administration. Equity can include shares, warrants or options and the value of the shares swapped doesn’t have to equal the loan written off. Also, there isn’t a set amount of time that shares have to be held by the creditor.
There’s a risk that the lender could result in having a significant shareholding, so anyone considering this restructuring approach should take care and seek professional advice.
It’s sometimes possible to postpone the interest payments on debt if the creditor allows the borrower to enter into an agreement enabling them to do so. Typically, this method of debt restructuring involves the debt being paid in full by a set deadline.
Subscription and repayment involves the lender subscribing cash in exchange for new share; the cash can then be used by the business to repay the debt.
CVAs can enable companies to pay back debts with creditors in a specific time frame. At least 75% of creditors who vote on the CVA proposal must agree for it to be authorised. This method of debt restructuring can help relieve immediate pressure on borrowers.
If you’re looking to improve your working capital, the Funding Options platform is a good place to start. We’ve been chosen by the British Business Bank (BBB) to help businesses find finance when they’ve been unable to find it through their main banking providers.
If your business has been adversely affected by COVID-19, you can also apply for the CBILS using the Funding Options platform. We can assist you in packaging your application in a way that gives you the best chance of getting an approval. Submit an enquiry today and a Finance Specialist will match you with a lender based on your needs and circumstances.Get started
Sign up for the best of Funding Options sent straight to your inbox.